Thursday, January 31, 2008

CMHC released their monthly Housing Now publication today and here is the down low for the Vancouver Census Metropolitan Area.

Starts were 1181.Units Under Construction were 25104.Completions were 1334.Completed and Unabsorbed Units were 1294.

In past years completions really spike upwards in the first few months of the year so we should look for a big increase in completions over the next 2-3 months with the corresponding decreasei in units under construction. These new units completing will add tremendously to the already climbing inventory of homes available for resale.

Tuesday, January 29, 2008

Here is a synopsis of last night's "Olsen on Your Side" segment of the local CTV News. Highlights are mine. Look for another segment every night this week on the CTV News. Watch last night's segment here.

This week we're beginning a five part series on real estate and what's putting pressure on owners and buyers alike.

I think there is an assumption that real estate prices always go up. But that's not always the case. In the US, the sub prime mortgage crisis has slashed prices in many desirable communities as a flood of homes come onto the market.

In just the last three months in California, 32,000 ended up in foreclosure 82,000 more have gone into default on their mortgages; an early indicator of possible foreclosure. In Phoenix 56,000 homes are for sale, many of them foreclosures, 10 times as many as three years ago. And that can't help but effect prices. In Fort Myers Florida, foreclosures have climbed 500 percent in one year while house prices have fallen by 30 percent in two years.

I'm not saying that is our future -- but it was only two years ago when there were stories in the US of real estate booming, prices out of reach for many people, and today, if you hadn't bought then you have a lot to choose from.

While we don't have a sub prime risk here, if the US slips into recession that will effect our economy and there are a number of other factors that could come into play.

Like what if our investors start taking their money to the US to cash-in on the bargains there? We talk about that on Wednesday in our series. And what about affordability? With prices where they are now -it's a real issue in Vancouver and other communities. We'll show you how the market is trying to accommodate first time buyers. And how to get the best price you can whether you're getting in or moving up. That's tomorrow.

And later in the week we also have a reality check story on what sacrifices you need to be willing to make to own a home here.

Real Estate: Where now?

Can the lower mainland's red-hot real estate market keep heating up?

Some experts say the increases we've been seeing just aren't sustainable and they've got a warning for speculators.

Catherine Stofer wants to own her own condo in Vancouver. But it's been tough. "I earn a good living, that's the frustrating part. Here it is at the age I'm at if I amortize, I'll be in my grave before I pay it off," she complains.

As prices have been rising, units have been getting smaller, in an effort to keep first time buyers able to buy something.

At 670 square feet the unit Stofer is looking at is considered a larger unit "Some of the dens we've seen basically couldn't accommodate a computer," she notes.

"I'd say we are somewhere near the top of the cycle," predicts UBC real estate professor Tsur Somerville. He says the numbers tell the story. Real estate prices in Greater Vancouver have been rising 15 percent per year on average for the last four years.

Historically, you'd expect six percent annual increases and we are two and half times that."The risk you are facing now is that you have a market that is near a peak. You have employment in major construction projects that is going to tail off. You've gotnegative news in terms of Canada's trading partner," calculates Somerville.

And since real estate prices have fallen in the US, will local or foreign investors pull their money out of this market to invest down south where our dollar buys more. What would happen if they did?

"If they sell and people notice prices are softening, are they going to race to sell: and is that going to cause a downturn particularly in the condo market? There are a lot of different ways this could play out and because we haven't had a lot of experience in that we really don't know the way this plays out," says Somerville.

Professor Somerville says if you are buying a place to live in long-term timing the market isn't critical. But speculators face a far riskier market today.

"The person who has over extended himself, is the person most at risk," he concludes.

Catherine just wants a place to call home. "Just keep trying, there has got to be something out there," she muses.

In all markets there is a psychological aspect. People believe that what happened last year will happen this year. If people believe prices will keep going up, then prices rise faster than the economy that supports them. But remember, expectations can also change quickly and that will affect the market too.

NEW YORK (CNNMoney.com) -- The housing market is only getting worse, according to the latest report from S&P Case/Shiller released Tuesday.

Home prices were down 8.4 percent in November compared with last year in its 10-city index, a record low. The 20-city index also fell 7.7 percent.

The Case/Shiller report compares same-home sale prices. The industry considers it to be one of the most accurate snapshots of housing prices. Previously, the largest year-over-year decline on record was 6.3 percent in April 1991. The November report marked the 11th consecutive month of negative returns for the index, and twenty-four months of decelerating returns.

Cities in trouble

"We reached another grim milestone in the housing market in November," said Robert Shiller, Chief Economist at MacroMarkets LLC and co-creator the index in a statement. "Not only did the 10-city composite index post another record low in its annual growth rate, but 13 of the 20 metro areas, each with data back to 1991, did the same." The worst hit market of the 20 metro areas covered was Miami, where the median home fell a whopping 15.1 percent in value. San Diego prices also fell steeply, down 13.4 percent. Las Vegas was off 13.2 percent and Detroit by 13 percent. Three cities did emerge with higher prices compared with 12 months ago: Prices rose 2.9 percent in Charlotte, N.C., 1.8 percent in Seattle and 1.3 percent in Portland, Ore. But even these markets have turned down over the last three months. Indeed, every city in the index recorded at least three consecutive months of falling prices through November.

The three biggest U.S. cities also recorded year-over-year declines; New York was down 4.8 percent, Los Angeles 11.9 percent and Chicago 3.9 percent. The losses in Los Angeles accelerated in November; that city recorded the largest month-over-month drop of any index city, 3.6 percent.

Sunday, January 27, 2008

I have commented before that there is good evidence to lead me to believe that the current run up in housing is not just a cyclical real estate price pattern but also a generational pattern that perhaps began in the mid-70s or 80s.

The giant baby boom generation born between 1946 and 1964 has been a dominant force in the housing market for decades. This group has always provided the largest age cohorts, and has created a surge in demand as it passed through each stage of the life cycle. As its members entered into home buying in the 1970s, gentrification in cities and construction of starter homes in suburbs increased. Their subsequent march into middle age was accompanied by rising earnings and larger expenditures for move-up housing. Looking ahead to the coming decade, the boomers will retire, relocate, and eventually withdraw from the housing market. Given the potential effects of so many of these changes happening in a limited period of time, communities should consider how best to plan this transition. Communities in the United States face an historic tipping point. After decades of stability, we expect the ratio of seniors to working-age residents to grow abruptly, increasing by roughly 30% in each of the next two decades.

We also expect that this change will make many more homes available for sale than there are buyers for them. The exit of the baby boomers from homeownership could have effects as significant as their entry, though with different consequences.

Sellers of existing homes provide 85% of the annual supply of homes sold, and home sales aredriven by the aging of the population since seniors are net home sellers. The ratio of seniors to working-age residents will increase by 67% over the next two decades; thus we anticipate the end of a generational housing bubble. We also find that younger generations face an affordability barrier created by the recent housing price boom. With proper foresight, planners could mitigate what otherwise could be significant consequences of these projections.We argue that the United States is currently experiencing a short-term housing market bubble that is nested within a longer-term, generational housing bubble of greater magnitude. The recent housing price boom has been remarkably strong. From 2000 to 2005, the median sales price reported by the National Association of Realtors rose 48.6% nationwide, and in some areas, such as California, the median sales price rose 117.1%. Only in 2007 did prices begin to slip in particular metropolitan areas and nationwide. This price run-up had a two-edged effect that substantially increased the home equity of existing homeowners while at the same time making housing less affordable for would-be home buyers. The result is a sharply increased generation gap, with the baby boomers largely gaining, while members of younger generations face higher affordability hurdles.

Tuesday, January 22, 2008

It has been awhile since I've put everything together in a complete picture for us to formulate an informed view on our local real estate market. This is a long post but well worth it.

First some history:

Average home prices have catapulted into the stratosphere recently.

The price of a benchmark condominium in Greater Vancouver has risen 111.5% in the past five years to a disgustingly unaffordable $377,579.

The price of a benchmark townhouse in Greater Vancouver has risen 100.8% in the past five years to a sickeningly unreachable $456,941.

The price of a benchmark single family home in Greater Vancouver has risen 95.5% in the past five years to nauseatingly excessive $730,399.

Even adjusted for inflation we are far above any historical norm.What this means is that the average family can’t afford to buy a first home or upgrade since the income required to fund this purchase via a mortgage is double or triple what they make.Now our current house prices wouldn't be a problem if people were earning more money but they aren't. Average incomes have not increased to the extent necessary to afford the average home.This wouldn't be all that concerning on its own either if rents were rising but the crux of the matter is that the income yield or rent from real estate in the Vancouver area has not increased to the extent necessary to justify today's high prices.Many observers point to low interest rates to justify current real estate prices but this does not explain our current situation either. If interest rates were low enough to justify current prices then we should see a similarity between mortgage payments and rents but we see a wide disparity between the two at this point in time. In fact we would have to go back to the heyday of 1981 and 18% interest rates for the mortgage payment to rent ratio to be as high as it is today.Many people see the current building boom and assume we have high population growth which, if it were true, would partially explain the huge run up in prices but it is just not true as population growth has not been high by historic standards.Granted, we have had population growth (in 1000s of persons) and all of these people do need to live somewhere. We did go through a period of time in the late 1990s and early 2000s when developers were not building a lot of new homes because there wasn't a lot of profit in it and demand seemed low but that changed quickly as interest rates declined dramatically after the tech bubble crash and 9/11. Subsequently, people went out house shopping in droves causing a shortage of supply in our local market.

We do live in a mostly free market economy and supply demand economic equations really come into play when we are discussing price movement of commodities such as real estate. When development companies are able to make a profit selling a home they will do so and the higher the profit earned they will consequently build even more homes. Logically, this would suggest that we shouldn't have a problem at all with prices because supply and demand should quickly come into balance but this is not so.

The problem is that real estate product takes from 6 to 24 months to produce and the time lag is substantial as people, after all, do need a roof over their head. This lag produces another effect - speculation - savvy speculators perceive shortage in the marketplace and act quickly to take advantage of the obvious price implications of shortage by buying any available units. This competition for housing causes prices to rise very quickly. This also causes a feedback loop and sends a signal to developers indicating that there is even more demand and so they build even more units. This feedback loop causes further effects such as skilled labour shortages and escalating construction costs as other people become aware and want to take advantage of the perceived shortage. People now feel the prices are justified because of these higher costs.

All the while the loop increases until we have exhausted all demand and the feedback loop that made everyone feel we were in a boom ends and it is replaced by a vicious circle of increasing developer inventory, speculators who cannot sell the homes they speculated on, decreasing construction input costs as competition becomes fierce, and increasing unemployment which further exacerbates the problem. We are nearing this exhaustion point as the number of units under construction in the Vancouver Census Metropolitan Area is way higher than justified by our population and many projects have completed or are scheduled to complete in the next 12 - 24 months.Anecdotes abound of Realtors, mortgage brokers, and wanna-be Donald Trumps picking up 4, 8, or 12 housing units before they are even completed so they can sell at a profit when the building is finished. The problem is that this will cause the vicious circle mentioned above and prices will decrease as all demand is exhausted and the supply burgeons with newly completed inventory and desperate speculators.

The prospects are bleak for Vancouver real estate as there are very few potential buyers out there, population growth is low, average incomes are below urban Canadian averages and we have a housing inventory that is projected to increase dramatically in the next 12 - 24 months. Stay tuned and grab some popcorn since this is going to get real interesting.

I heard a panel of financial market analysts on CKNW this morning comprised of Michael Campbell, Michael Levy, Helmut Pastrick and Bob Rennie. I am amazed every time I hear the silver tongued Bob Rennie open up his mouth. I believe that Bob actually believes the crap he says about Vancouver being able to weather the financial storms that are hurtling around the world right now and that our economy is an invincible fortress built upon ever increasing real estate wealth.

At times, during the few minutes I could tolerate, it seemed as if the 3 actual financial industry players were about to say - "What is this guy doing here?" After all Bob Rennie is a marketer, not an economist. He wouldn't know a price/rent ratio if it hit his Rolls Royce on the hood.

Bob, after being lobbed softball questions by host Bill Good, spouted the usual nonsense about the Vancouver Olympics, world class city, blah, blah, blah. Are you nucking futs? Blind? Deaf?

In a move that basically puts central bank interest rates below the rate of inflation, the US Federal Reserve lowered their prime rate 75 basis points to 3.5% before markets opened this morning.

Just a reminder to everyone out there, this is exactly the stupid type of move that got us into the whole mortgage mess, housing bubble, credit crisis. Look for the next bubble to start anytime now with even more interest rate cuts left to come with the inflation beast lurking and about to be let out into the street.

The TSX is down nearly 5% this morning and down well over 10% year to date. We are back into 2006 territory for the level of the TSX and I am getting calls from clients now to sell everything. This is, from my past experience, the time to start buying. Most people are their own worst enemy to their long term financial health. They buy when they should be selling and the sell when they should be buying.

Friday, January 18, 2008

I suggest everyone visit http://www.storyofstuff.com/ and watch. This is the mess we have gotten ourselves in as a society and we need to come up with solutions for a more sustainable way of life for our financial well being, our health, and for our environment.

Thursday, January 17, 2008

This is a perfect story illustrating why the housing market problems are not a "subprime" problem as is commonly argued in the media. This is a poor interpretation of the problems that are occuring. The correct thesis is that homes were overvalued and lenders were far too willing to lend way above traditional multiples of incomes or property values. This is, unfortunately coming soon to a neighbourhood near you. This story rings so true of the Vancouver area - a facade of wealth and a chronic over-extension of family and personal finances.

From Reuters (emphasis mine):

By Nick Carey HINSDALE, Illinois (Reuters) - A house in this wealthy Chicago suburb is far beyond the reach of most Americans. Unfortunately, Hinsdale may also now be too expensive for some of the people who already live here.

"There is a section of the population here that over-extended themselves to buy here and then keep up the facade of wealth," said Sharon Sodikoff, a broker associate at local real estate agency Prudential Homelife Realty. " In the next year or so they'll be forced out in dribs and drabs."

With a picturesque little downtown area and large, expensive houses -- according to the Headrick-Wagner Consulting Group, the average home sale price here in the 12 months to September 30, 2007, was around $1.15 million -- Hinsdale seems a world away from the housing slowdown that may have brought the U.S. economy to the brink of a recession.

But even here, far from the housing crisis' epicenter, high earners with good credit may be heading for trouble as their adjustable rate mortgages (ARMs) adjust beyond their means, local real estate agents and others say. In a normal housing market they'd be able to sell, but now they are stuck.

"The next wave of problems will come from prime borrowers who bought too much house or borrowed too much against it," said Michael van Zalingen, director of home ownership services at Neighborhood Housing Services of Chicago. A "prime" borrower is one with good credit.Real estate agents warn that some high-income borrowers have already been forced to sell or leave their homes and more will follow. Especially those who used their homes as ATMs, withdrawing cash via home equity loans.

"For those who utilized home equity loans for five to ten years to finance their lifestyle, the chickens are coming home to roost," said Chicago-based real estate agent Marki Lemons.

There are also signs some lenders are warily eyeing "prime" borrowers. Tom Kelly, spokesman for Chase Home Lending, a unit of JPMorgan Chase & Co, said the company raised its reserves for possible home equity loan loss for subprime and prime borrowers by $635 million in the second and third quarters last year.

"The concern is people who have borrowed a large percentage of the equity (in their homes)," Kelly said. "Now the value of their homes is falling and they can't refinance.""Some just stop paying and walk away," he added.

SHORT SALE

Getting into property during the boom was easy, with mortgages freely available for no money down.

Then came the subprime crisis and the credit crunch, slowing the market, pushing prices down and home inventories up. In Hinsdale, for instance, the supply of homes on the market rose to more than 17 months in early October from less than 6 months in January 2006. While it's apparently a buyers' market, Lawrence Yun, chief economist at trade group the National Association of REALTORS, says high-end borrowers are put off by the high interest rates now applied to so-called "jumbo" mortgages, those for $417,000 or more.

"Potential buyers say 'no way am I buying at that price,'" Yun said. "If people can't enter the market, this slows everything down and puts pressure on foreclosures."

If some borrowers can't get into the market, there are others who can't sell to get out. Home owners who bought recently with no money down are the ones most likely to abandon a property when they fall behind on the mortgage.

"I've seen people who bought less than a year ago and have no equity in their homes simply walking away with no regard for the consequences," said Genie Birch, a real estate agent at Chicago-based Koenig & Strey GMAC who covers the city's wealthier districts.

Real estate agents say speculative investors who bought to make a profit are also walking away as the rents they charge fall behind the mortgage payments as their adjustable-rate mortgages readjust.

The home owners who find it harder to walk away are those who took out large home equity loans before prices started falling and now owe far more than their home is worth.

"It's difficult for home owners in that situation to sell as they'll still be left owing money," said Dave Hanna, managing partner of Prudential Preferred CRE, which owns Prudential Homelife Realty in Hindsale.

Unlike subprime borrowers, however, wealthy home owners are more likely to try to cut a deal with their lender, rather than end up in foreclosure. The alternative solution available to them is to opt for a short sale.

Under a short sale agreement, the borrower sells below the mortgage value and the lender writes off the difference. The lender gets less than originally anticipated, but is not stuck with a foreclosed property. The borrower's credit rating is damaged, but not as badly as if they had lost the home.

"You won't see many foreclosed homes here because that would involve public embarrassment," Prudential Homelife Realty's Sodikoff said. "But they will call their realtor and get them to quietly broker a deal to get out of their homes."

Tuesday, January 15, 2008

No time to do a post today so here is a RBC Economics Report that outlines some of the reasons for today's market action. These bad numbers were in addition to the massive asset writedowns at Citigroup and CIBC. Interesting times indeed.

U.S. retail sales growth dropped 0.4% in December, a much weaker result than the market’s expectation of flat sales. However, the sales decline was following a very robust, although downwardly revised, 1% gain in November. Ex-autos, sales were down 0.4%, again weaker than expectations.

The drop in retail sales in December was, in part, attributable to nominal sales at gasoline service stations dropping 1.7%. However, this partly reflected a decline in gasoline prices. Excluding this component along with the volatile motor vehicle and building material components, sales were actually up 0.2%, building on November’s downwardly revised 0.8% gain (previously reported at 1.3%).

The portion of retail sales that feeds into quarterly spending — retail sales ex autos, building materials and garden equipment, and supply stores — fell a slight 0.1% after surging 1.6% in November. During the November-December holiday period, sales were up 0.3% on average, compared to 0.7% in 2006 and 0.4% in 2005.

The U.S. retail sales figures are consistent with a drop in real spending in December, which we currently estimate to be -0.1%. Despite the likely decline, November’s real spending surge makes it highly likely that spending will come in above 2.5% in the fourth quarter. Slower spending in December does suggest somewhat softer spending momentum heading into the first quarter of 2008. We expect consumer spending growth to weaken to a 1.5% annualized pace during the first three months of the year.

The softer first-quarter 2008 momentum implied by the weaker-than-expected retail sales data will likely keep the Fed aggressive with their policy actions in order to mitigate the downside risks to growth. We are expecting that the Fed will opt for 50 basis points of cuts at their January 29-30 policy meeting.

The December producer price index fell 0.1%, a substantial slowing from the 3.2% monthly increase in November. The earlier strong increases are keeping the year-over-year rate high at 6.3%, although this is down from the 7.2% recorded in the previous month. On a core, or ex food and energy, basis, December prices were up 0.2% and 2.0% during the past year. The monthly increase was down from 0.4% in November, although the year-over-year rate was unchanged from the previous month.

The moderation in the overall monthly increase was largely a reflection of the 1.9% fall in energy prices in December after surging 14.1% in November. The moderation was tempered by a 1.3% rise in food prices after recording no change in the previous month. Upward pressure was evident in a number of food components, including fresh vegetables, beef and veal, and processed fruit and vegetables.

The moderation in core prices largely reflected a 0.9% drop in passenger cars after a 0.6% jump in November. Car companies are likely cutting prices to help move out the remnants of the old car lines as the 2008 models are rolled into the showrooms.

Today’s report indicates that earlier energy price increases are keeping the annual increase in producer prices high at 6.3%. The year-over-year increase in core prices is rising a much more moderate 2%, although this is likely at the upper end of what is deemed as acceptable by the Fed. As well, Fed Chairman Bernanke has gone to great lengths to emphasize that the Fed had not taken its eye off the risk of higher energy prices putting even greater upward pressure on the core measure. However, despite these risks, the near-term focus of the central bank is to ensure that the economic expansion continues in the face of the ongoing financial market volatility and attendant credit tightening. Thus, today’s report does not alter our view that Fed funds will be lowered a further 100 basis points during the first half of this year, with the first installment, a 50-basis point cut, coming at the conclusion of the next FOMC meeting in January 29-30.

Friday, January 11, 2008

CHICAGO, Jan 11 (Reuters) - U.S. grains exploded on Friday, with bullish government data helping corn, soybeans and wheat soar and build on their impressive gains in 2007 while raising concerns over food price inflation that has been edging up.

The catalyst for the rally was a slew of reports from the U.S. Agriculture Department on crop production and stocks in the United States and across the globe -- keenly awaited data that had a few surprises in store for traders.

"What a report today," Rich Feltes, senior vice president of MF Global said. "Corn stocks tops the list of surprises. Corn could quite easily be limit-up today," he said on a CME Group-hosted panel discussion of the reports more than an hour before the Chicago Board of Trade opened for business.

Corn futures did open 20 cents per bushel higher, the most the market can move either way on a day, and ended that way.

Soybeans and wheat futures also rose by the daily trading limit of 50 cents and 30 cents a bushel, respectively.

"It's like a perfect storm," said analyst Dax Wedemeyer of U.S. Commodities, based in West Des Moines, Iowa.

He said high prices for corn, however, along with those for wheat and soybeans, could translate into further increases in the price of food products for consumers.

"For the buyer, obviously there will be economic concerns because before too long this will cause higher prices for food. We are already seeing this happen," he added.

MF Global's Feltes said the USDA needs to "choke off ethanol usage in the country," adding that the high price of corn, fueled in part by demand from the renewable fuel sector, was hurting livestock operations that depend on corn for feedstock.

He said the livestock sector was going "deeper into the red" because of the high cost of corn, which gained 14 percent in value last year and hit 11-year highs this year.

The U.S. Agriculture Department on Friday forecast U.S. surplus corn stockpiles at 1.438 billion bushels at the end of the 2007/08 marketing year on Aug. 31.

The tally is down from the USDA's December estimate of 1.797 billion and compared with trade estimates for 1.709 billion. The USDA pegged soybean ending stocks at 175 million bushels, down from December's 185 million and compared with trade estimates for 172 million.

The USDA forecast wheat ending stocks in the 2007/08 season that ends May 31 at 292 million bushels, up from its December estimate of 280 million bushels and compared with 271 million estimated by traders and analysts.

The USDA reported 2008 U.S. winter wheat seedings at 46.610 million acres, up 4 percent from 2007, but below the average trade estimate of 48.6 million.

Feltes said grain and oilseed markets are going to be very sensitive to developments in crop weather in South America, where Brazil and Argentina are key producers of soybeans, corn and wheat.

He said CBOT futures posted gains in Asian trading hours on Friday "just on a turn in the Argentine weather to a drier tone."

Dan Basse, president of research firm AgResource Company, told the panel that the reports would put pressure on the USDA to move land out of the Conservation Reserve Program, where farmers are paid to idle farm land for environmental reasons.

CBOT March corn rose the 20-cent limit to $4.95 a bushel, with the May crossing the $5 mark. March wheat rose 26-3/4 cents to $9.09-1/4 while May rose the 30-cent trading limit to $9.22-1/2.

March soybeans ended 42 cents higher at $12.86, while May ended 38-1/2 cents higher at $12.98-3/4 after rising the 50-cent limit. (Reporting by K.T. Arasu, editing by Matthew Lewis)

Thursday, January 10, 2008

Credit card use in Canada is a prolific and a very profitable business for financial institutions. At the end of 2006 there were over 60 Million Visas and MasterCards in the pockets of 30 million Canadians. There were over 26 Million active Visa and MasterCard accounts. So, irrespective of American Express, Diner's Club, and department store cards, every man, woman, and child in Canada has 2 cards each.

What do we do with all of this available credit? We spend, a lot. Visa and MasterCard transacted over $214 Billion dollars worth of business in Canada in 2006 and were able to charge over $29 Billion dollars of interest and fees on the 26 Million active accounts.

Over the past 10 years, the number of active credit card accounts has doubled, credit card transaction volume has tripled and the profit from these transactions has quadrupled for the card issuers. Credit cards have been a high growth business to be sure.

Canadian are diligent about paying their credit card bills too. The delinquency rate on credit card balances is low at less than 1% and has remained quite low for at least 15 years. A seemingly low risk business with very large profit margins. I wonder what the future has in store.

How do you feel about the large profits being generated by the credit card companies? How do you use your credit cards? Merchant fees can sometimes be high and I often wonder how much that affects the price of the goods we buy.

My wife and I use our Visa card for nearly every purchase we make because we get cash back and don't have to carry cash or pay any banking fees for using a debit card. We also pay off our balance every month and haven't paid a cent in interest or fees since having these cards. I know that isn't necessarily typical among the general population but is likely fairly representative of the readership of this blog!

Monday, January 07, 2008

I had a look at the Canadian Bankers Association data on mortgages since 1990 and thought I'd compare it to housing prices. I suppose this data shouldn't shock anyone but I thought I'd post it anyway for discussion. The data seems to indicate that arrears on mortgages, that is those mortgages that are at least 90 days late on payments, increase substantially when house prices have fallen. Conversely, mortgage arrears are low when house prices are rising.

This makes sense logically as home prices rise, refinancing options are plentiful to all mortgage holders who run into trouble making payments. When house prices are stagnant or falling the mortgage holder has very few options and may or may not have equity to draw on to cushion the loss of payment making ability.

As home prices fall, look for a significant upswing in the percentage of mortgages in arrears. Even a subdued decrease in home prices could unfortunately put the screws to a lot of mortgage holders - witness the mid-90s as an example.

Friday, January 04, 2008

Yes you read that chart correctly. With ONLY A MODEST 5% PER QUARTER INCREASE - - THAT IS ONLY 20% PER YEAR - - the typical Greater Vancouver home will be worth over $9,000,000 in 2020. But we all know the two week long sporting event known as the Winter Olympics are coming and that will boost our housing market even further and 20% OR MORE PER YEAR APPRECIATION IS A SURE THING. Read on if you want to be rich.

The advice I'm about to give is for the bold. Frightened little bunnies who are afraid of wealth should read no further.

1) There's a pot of gold at the end of every rainbow and we're all living on rainbow street.

Buy as much house as you can. Don't settle for a $300,000 house when a bank will lend you a million. But the timid out there will say "but I can't afford to buy a house that expensive." Pal, you can't afford not to. Let's employ my favorite friend, the calculator. Let's say you buy a $300K house and I buy a $1 million house. Assuming the standard 20% yearly appreciation rule, after 5 years you'll have roughly $450K in profit (assuming you do not leverage this perpetual cash machine to produce even more wealth).

However, I will have made roughly $1.5 million in profit. As even the most jaded, bitter renter can see, the $1 million dollar home has produced over 3 times as much wealth in only 5 years. Imagine how much better off I'll be in 10 years.

B) - There are no "bad" neighborhoods in Greater Vancouver.

The so-called bad neighborhoods in Greater Vancouver (places like East Hastings, Whalley) have been some of the most profitable homes in real estate history. Today you can not buy a home in these places for under $300,000 and often times these "violent palaces" run over half a million or more.

Even today, after the large run up in prices, these homes are still profitable for the investor with foresight. Let's say you buy a brand new condo in the coveted neighborhood of Whalley for $300,000. As the numbers above show after 5 years of 20% increases you'll have $450K in profit. Let's say you get robbed twice a year, average cost of $5K per robbery, and stabbed or shot every 2 1/2 years costing you $50K in lost wages/hospital bills. $450,000 - 2*5*5,000-2*50,000 = $300,000 PROFIT. I don't know about you but I will take the occasional shiv in the back for $300K every 5 years.

Note: I left out family members being murdered because with proper insurance there should be no net loss for this event. In fact, it could be an equity building opportunity if your loved one had large amounts of insurance. And don't forget, in addition to that treasured Whalley address you get the much sought after Whalley schools and community. You can't put a price on that Vancouver lifestyle.

III. Don't worry, be happy.

Don't worry about the terms of your home loan. Only focus in on the payment. We in the west are no longer squirreling away money like some deranged rodent. No my friend, we are in the cash flow management business (just like how we no longer produce anything in this country, we outsource it all and manage the world). Who cares if the loan is interest only or if the interest costs more than rent. If the payment works, bank it. You can use the guaranteed appreciation to take care of all the details of how you'll pay the money back.

Still doubting? Ask yourself, does a raindrop worry about how to steer the river? No, it sits back and enjoys the ride. Well, there is a river of money flowing right now. You can either let it flow to you or sit by on the banks and watch it pass on by. The choice is yours.

Four) Become the master of your domain.

Become one of the highly trained real estate professionals that are profiting mightily from this new paradigm. Like the previous example let's look at 2 different people. Both are recent high school graduates. One decided to attend an Ivy League school for 4 years to get a degree in one of those outdated majors like engineering or one of the sciences. After graduation they attend grad school for 5 years and get their Ph.D. And now after 9 years of hard, menial, drudgery, what do they get as their reward? A job paying $50-60,000, if they are lucky. By the time this "genius" pays off their student loans they'll be 40 years old. 22 years of eating ramen and riding your bike to work might make some drugged out hippy happy but for us real Canadians we want $$$.

Now let's look at his friend. He decides college is for suckers. He works as a mortgage broker and part time real estate agent. He earns $100-200K a year. By the time Harvard boy has graduated our wise mortgage broker will have a BMW, 2 houses, and a sail boat. And he did all this without wasting his time with books or filling his brain with useless knowledge. He is a producer of wealth while the self-absorbed academic is a parasite on society. What would you rather be, a producer or a parasite?

Thursday, January 03, 2008

The Fraser Valley Real Estate Board released their monthly statistics package today for the month of December 2007. The numbers are in and here is the analysis.

Sales were seasonally slow as expected in December with 1001 units sold during the month. At the end of December there were 7168 residential units available for sale in the Fraser Valley. This puts the current months inventory at 7.2. This is the highest December level for as far back as online records are available.

Prices of all types of homes rose during the month of December in nearly every area in the Fraser Valley pulling a rabbit of the hat of sorts for the month. I did not expect prices to rise in a market so full of choices for buyers. It is possible that the smaller level of sales led to a different mix of sales being completed and December buyers could be more 'urgent' buyers than is typical for the rest of the year.

The year over year change in the quality adjusted house price index has been declining from the peak appreciation levels of mid-2006 and it is a trend I expect will continue through 2008. We may even see negative YOY price changes this year.

As I have already mentioned, Months of Inventory was quite high at 7.2 months during December. Quarterly price changes were muted although positive. If months of inventory stays high during January and February there will be significant negative price pressure coming into the spring selling season.

The market continues to amaze me with an incomprehendable amount of demand at these price levels. I fail to understand why someone would buy a home that they can rent for half the monthly nut.

Mohican's 2008 Forecast for the FVREB:

1) Months of Inventory will remain above 6 for the entire year.2) YOY appreciation will be 0% or negative by July/August.3) The FVREB House Price Index will be -5% to -10% for 2008. December 2007 is the all time high at 220.3 and it will be 200 to 205 by the end of the year.

Note: If MOI drops below 6 I think that the price changes will not be as negative as I suggest. Of course this is all hypothetical and I've been wrong before.

Wednesday, January 02, 2008

The TSX composite posted a reasonably decent gain in 2007 and the strategist at UBS expects more of the same in 2008. His 12-month target for the Toronto benchmark is 15,000. Mr. Vasic believes that commodity prices will ease from current levels but remain relatively high as global growth decelerates toward a more normal pace. He acknowledges that the sectors most directly affected by the U.S. slowdown and the strong Canadian dollar may take somewhat longer to recover, but look to be attractive turnaround prospects as the year progresses. He said the Canadian economy will be the main catalyst for the financials, consumer discretionary and staples, as well as telecom, all of which Mr. Vasic recommends overweighting.

He underweights energy and materials and is "neutral" on technology, staples and industrials.

Vincent Delisle - Scotia Capital Inc.

The director of portfolio strategy at Scotia Capital expects the S&P/TSX composite to rise to only 14,500 in 2008. But that will still allow stocks to beat out cash and bonds. His asset allocation model has stocks and cash at 5 per cent overweight and bonds 10 per cent underweight.

He sees U.S. economic growth slowing in the first half of the year. "A broader U.S. slowdown will certainly test the resilience of other economies and we believe it would be more accurate to cheer the era of desensitization to the U.S. rather than outright decoupling," he said in a recent outlook report. He sees the risks to economic growth looming larger than inflationary risks in the near term.

When it comes to sector strategy, he argues for a combination of defensive issues such as golds, utilities and consumer staples and early cyclical stocks such as financials and telecom. He also continues to favour the fertilizers.

Ben Joyce - BMO Nesbitt Burns Inc.

The portfolio strategist draws comparisons between the current situation in North American stock markets and those in 1998. He is persuaded that the current predicament is "more a crisis of confidence in the financial system, similar to 1998, than a prelude to a recession and a bear market." In 1998, North American stock markets plunged 20 to 25 per cent in three months and then staged an impressive recovery, he noted. "Because of the difficulties in sorting out the subprime securitization mess, the current correction is evolving as shallower, but more prolonged," he said in a report.

Mr. Joyce banks on interest rate cuts and strength in the emerging economies to limit the economic fallout from the credit crunch to a global slowdown rather than a recession.

He expects that Canadian corporate profits, as represented by the TSX composite members, as well as profits of the S&P 500 firms, will, after stalling in the third and fourth quarters of 2007, rise modestly in 2008 and 2009.

Mr. Joyce points out the market appears to be factoring a 15-per-cent decline in S&P/TSX profits over the next 12 months and a 25-per-cent decline for S&P 500 profits. He has one-year targets of 15,000 for the S&P/TSX composite and 1,650 for the S&P 500.

When it comes to S&P/TSX sectors, Mr. Joyce sees leadership rotating into selected cyclical sectors, but remains cautious on the bank.

Myles Zyblock - RBC Dominion Securities Inc.

The chief institutional strategist at RBC Dominion Securities Inc. cut his recommended exposure to stocks modestly at the beginning of December for both Canada and the U.S. out of concern about the near-term prospects, particularly in light of potential for further fireworks from the credit markets over the next quarter.

But his longer-term view is more optimistic. "While the current turbulence is probably not over, the longer-term outlook for North American equity markets is beginning to improve," he wrote in a market comment.

Mr. Zyblock also recently lowered his recommendation on Canadian financials to "underweight" from "market weight," saying he much prefers insurance issues. He also suggests a below-benchmark exposure to materials. At the same time, he raised the rating on energy issues to "market weight" from "underweight" saying that the opportunities reside mainly in the large-cap integrated space.

Nick Majendie - Canaccord Capital Inc.

The chief investment strategist at Canaccord is a relatively recent convert to the bullish camp.

He thinks North American markets could surprise on the upside, producing robust returns over the next 12 to 18 months.

For the S&P/TSX composite, he has a one-year target of 15,200, which he thinks may be conservative.

"The actions of the Fed [U.S. Federal Reserve Board], the shape of the yield curve and the best equity market valuations in 29 years in relation to bonds lead us to believe that the odds of a resumption of a healthy bull market over the next 12-18 months, if not longer, are high," he said.

"That is not to say that there will not be bumps along the road on the way upward as there are likely a number of financial problems yet to be revealed over the next few quarters," he said.

David Wolf - Merrill Lynch Canada

There is a bearish tone to the views of the economist and strategist for Merrill Lynch Canada on the Canadian stock market. He believes it will take until 2009 for the S&P/TSX composite to regain and sustain the highs set last summer.

He anticipates that profits, after rising by single digits in 2007, will actually decline modestly in 2008, before recovering in 2009. That, he expects, will put pressure on price/earnings multiples. But those negative influences on valuations will be offset, he expects, by gradually declining interest rates and the inflow of sovereign wealth funds.

Taken altogether, the factors suggest to Mr. Wolf that the Canadian market should be underweighted. Incorporating his profit projections into his forecast gives him a target of 13,300 for 2008 and 14,500 in 2009.

"After five years of feasting on double-digit returns, Canadian equity investors may have to endure a couple of years of famine," he warned.

Bob Gorman - TD Waterhouse

The chief portfolio strategist at TD Waterhouse says "the biggest question facing investors at the moment is whether the five-year-old global bull market will see a sixth year, or whether the subprime lending crisis will tip the U.S. into recession and cause a bear market."

But he feels positive about the situation. "There has been so much coverage of the subprime crisis that we believe it's already embedded in current market prices; therefore, other strong fundamentals, when combined with the stimulative effect on markets of the presidential cycle, will outweigh the subprime impact and keep the economy out of recession territory," he said.

He expects Canadian and U.S. equity markets will rise for a sixth consecutive year and generate single-digit returns.

However, in 2008, unlike the past few years, the impetus will not come from commodity prices, but rather from continued rotation into less cyclical sectors exemplified by major insurers such as Manulife Financial Corp., Power Financial Corp. and Sun Life Financial Inc.

Jeff Rubin - CIBC World Markets Inc.

The chief economist and strategist at CIBC World Markets Inc. admits that the subprime mess in the U.S. is proving to be a more protracted event than he first thought and has pruned his overweight position in equities, but that hasn't significantly blunted his optimism on the Canadian market in 2008.

He doesn't expect the subprime mess will lead to either a U.S. recession or an end to the five-year long bull market.

He expects the U.S. economy will slow for two quarters, and then economic growth will reaccelerate gradually, setting the stage for North American stocks to rally to new cyclical highs."That rally should see the TSX top 16,000 by the end of 2008," he said in a report.

The forecast of 16,200 for the S&P/TSX implies a year of double-digit gains, including dividends.

Mr. Rubin recommends a modest overweighting in consumer staples, an overweight in materials and energy and underweights in telecom, consumer discretionary, technology and industrials.

Subodh Kumar - Independent strategist

Mr. Kumar doesn't believe a bear is lurking in the Canadian stock market but he isn't as optimistic as some other market observers, either. He sees the S&P/TSX composite inching upward to 14,000 by year-end. But he expects it will be rough going for the first half of the year. After that, though, he anticipates more stable capital markets and a global recovery will provide support to the market. So too will a new profit cycle, which he sees after profits bottom out in the middle of 2008.

Mr. Kumar believes that the key consideration in stock picking in the first six months of the year will be quality of leadership and execution. "Recovery later is likely to be crucially linked with recovery in the financials," he said.

He recommends underweighting the Canadian consumer discretionary and manufacturing sectors because of the impact of the high-flying Canadian dollar and the uncertainty in key U.S. sectors such as housing and autos.

Mr. Gignac, chief economist and strategist at National Bank Financial, and Mr. Lapointe, assistant market strategist, hold one of the most bearish views of the Canadian market around, expecting that the S&P/TSX composite will slide from its current level to 12,800 over the next year. Given that target and the fact that they see the S&P 500-stock index losing some ground as well, it is little surprise that their asset allocation model has equities at just 40 per cent, while bonds are 45 per cent and cash 15 per cent.

But then, they note that the three interest rate reductions implemented by the U.S. Federal Reserve Board last fall have failed to trigger a stock market rally, unlike the situation following the 1998 Asian crisis.

Moreover, they attach a 50-per-cent probability to a recession in the United States and recessions, they point out, tend to be "very bad for the stock market."

Renting Resources

"About the time everybody's walking around complacently, congratulating each other—"We've sure got it made! Now we can take it easy!"—suddenly everything will fall apart. It's going to come as suddenly and inescapably as birth pangs to a pregnant woman."